An Introduction To Managerial Accounting and Cost Concepts: Mcgraw-Hill /irwin

Chapter 1
An Introduction to Managerial
Accounting and Cost Concepts
McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Work of Management
Planning
Planning
Directing
Directing and
and
Motivating
Motivating
Controlling
Controlling
Planning
Identify
Identify
alternatives.
alternatives.
Select
Select alternative
alternative that
that does
does
the
the best
best job
job of
of furthering
furthering
organization’s
organization’s objectives.
objectives.
Develop
Develop budgets
budgets to
to guide
guide
progress
progress toward
toward the
the
selected
selected alternative.
alternative.
Directing and Motivating
Directing and motivating involves managing day-

to-day activities to keep the organization running
smoothly.
 Employee work assignments.
 Routine problem solving.
 Conflict resolution.
 Effective communications.
Controlling
The
The control
control function
function ensures
ensures
that
that plans
plans are
are being
being followed.
followed.
Feedback
Feedback inin the
the form
form ofof performance
performance reports
reports
that
that compare
compare actual
actual results
results with
with the
the budget
budget
are
are an
an essential
essential part
part of
of the
the control
control function.
function.
Planning and Control Cycle
Formulating
Formulatinglong-
long- Begin
and
andshort-term
short-termplans
plans
(Planning)
(Planning)
Comparing
Comparingactual
actual Implementing
Implementing
to
toplanned
planned Decision plans
performance Making plans(Directing
(Directing
performance and
(Controlling) andMotivating)
Motivating)
(Controlling)
Measuring
Measuring
performance
performance
(Controlling)
(Controlling)
Comparison of Financial and
Managerial Accounting
Learning Objective 1
Identify and give examples of

each of the three basic
manufacturing cost
categories.
Manufacturing Costs
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead
The Product
Direct Materials
Raw materials that become an integral part of

the product and that can be conveniently traced
directly to it.
Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile
Direct Labor
Those labor costs that can be easily

traced to individual units of product.
Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers
Manufacturing Overhead
Manufacturing costs cannot be traced directly to

specific units produced.
Examples:
Examples: Indirect
Indirect materials
materials and
and indirect
indirect labor
labor
Materials used to support Wages paid to employees

the production process. who are not directly
involved in production
Examples: Lubricants and work.
cleaning supplies used in the Examples: Maintenance
automobile assembly plant. workers, janitors and
security guards.
Classifications of Nonmanufacturing Costs
Administrative
Selling Costs
Costs
Costs necessary to get All executive,

the order and deliver organizational, and
the product. clerical costs.
Distinguish between
product costs and period
costs and give examples
of each.
Product Costs Versus Period Costs
Product costs include Period costs are not

direct materials, direct included in product
labor, and costs. They are
manufacturing expensed on the
overhead. income statement.
Cost of
Inventory Goods Sold Expense
Sale
Balance Income Income

Sheet Statement Statement
Quick Check 
Which of the following costs would be

considered a period rather than a product cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
Quick Check 
Which of the following costs would be

considered a period rather than a product cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
Prime Cost and Conversion Cost
Manufacturing costs are often

classified as follows:
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Material
Material Labor
Labor Overhead
Overhead
Prime Conversion
Cost Cost
Comparing Merchandising and
Manufacturing Activities
Merchandisers . . . Manufacturers . . .
 Buy finished goods.  Buy raw materials.
 Sell finished goods.  Produce and sell
finished goods.
MegaLoMart
Balance Sheet
Merchandiser Manufacturer
Current Assets Current Assets
 Cash ❖ Cash
 Receivables ❖ Receivables
 Prepaid Expenses ❖ Prepaid Expenses
 Merchandise ❖ Inventories:
Inventory 1. Raw Materials
2. Work in Process
3. Finished Goods
Balance Sheet
Merchandiser Manufacturer
Current Assets Current Assets
 Cash ❖ Cash
 Receivables ❖ Receivables
Materials waiting to
 Prepaid Expenses Prepaid
❖ be Expenses
processed.
 Merchandise
Partially complete ❖ Inventories:
Inventory
products – some 1. Raw Materials
material, labor, or 2. Work in Process
overhead has been
3. Finished Goods
added.
Completed products
awaiting sale.
Prepare an income
statement including
calculation of the cost of
goods sold.
The Income Statement
Cost of goods sold for manufacturers

differs only slightly from cost of goods
sold for merchandisers.
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory $ 14,200
+ Purchases 234,150
Goods available
for sale $ 248,350
- Ending
merchandise
inventory (12,100)
= Cost of goods
sold $ 236,250
Inventory Flows
Withdrawals
Withdrawals
Beginning
Beginning Additions
Additions Ending
Ending
balance
balance
+ to
to inventory
inventory
= balance
balance
+ from
from
inventory
inventory
Quick Check 
If your inventory balance at the beginning of

the month was $1,000, you bought $100
during the month, and sold $300 during the
month, what would be the balance at the end
of the month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.
Quick Check 
If your inventory balance at the beginning of

the month was $1,000, you bought $100
during the month, and sold $300 during the
month, what would be the balance at the end
of the month?
A. $1,000. $1,000 + $100 = $1,100
B. $ 800. $1,100 - $300 = $800
C. $1,200.
D. $ 200.
Prepare a schedule of cost

of goods manufactured.
Schedule of Cost of Goods Manufactured
Calculates the cost of raw

material, direct labor and
manufacturing overhead used
in production.
Calculates the manufacturing

costs associated with goods
that were finished during the
period.
Manufacturing Work
Raw Materials
As
As items
Costsitems are
are removed
removed from
from
In Process
Beginning raw
raw
raw materials
materials inventory
inventory and
and
+
materials inventory
Raw materials
placed
placed into
into the
the production
production
purchased process,
process, they
they are
are called
called direct
direct
= Raw materials
available for use materials.
materials.
in production
– Ending raw materials
inventory
= Raw materials used
in production
Manufacturing Work
Conversion
Conversion
Raw Materials Costs In Process
costs
costsarearecosts
costs
Beginning raw Direct materials
materials inventory + Direct labor
incurred
incurredto to
+ Raw materials + Mfg. overhead convert
convert the
the
purchased = Total manufacturing
= Raw materials costs
direct
directmaterial
material
available for use into
into aafinished
finished
in production
– Ending raw materials
product.
product.
inventory
= Raw materials used
in production As
Asitems
items are
are removed
removedfrom
from raw
raw
materials
materialsinventory
inventoryandand placed
placedinto
into
the
the production
production process,
process, they
theyare
are
called
calleddirect
direct materials.
materials.
Manufacturing Work
Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials – Ending work in
inventory process inventory
= Raw materials used All
All manufacturing
manufacturing
= costs
costs incurred
incurred
Cost of goods
in production manufactured.
during
during the
theperiod
period are
are added
addedto tothe
the
beginning
beginning balance
balanceof
of work
work in
in
process.
process.
Manufacturing Work
Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials – Ending work in
inventory process inventory
= Raw materials used = Cost of goods
Costs
Costsassociated
associatedwith
in productionwiththe
the goods
goods that
that manufactured.
are
arecompleted
completed during
duringthe
the period
period are
are
transferred
transferredto
tofinished
finished goods
goods
inventory.
inventory.
Cost of Goods Sold
Manufacturing Cost Flows
Balance Sheet Income
Costs Inventories Statement
Material Purchases Raw Materials Expenses
Direct Labor Work in

Process
Manufacturing
Overhead Finished Cost of
Goods Goods
Sold
Selling and Period Costs Selling and

Administrative Administrative
Quick Check 
Beginning raw materials inventory was

$32,000. During the month, $276,000 of raw
material was purchased. A count at the end of
the month revealed that $28,000 of raw
material was still present. What is the cost of
direct material used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000
Quick Check 
Beginning raw materials inventory was

$32,000. During the month, $276,000 of raw
material was purchased. A count at the end of
the month revealed that $28,000 of raw
material was still present. What is the cost of
direct material used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000
Quick Check 
Direct materials used in production totaled

$280,000. Direct labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs incurred for the
month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.
Quick Check 
Direct materials used in production totaled

$280,000. Direct labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs incurred for the
month?
A. $555,000
B. $835,000
C. $655,000
Quick Check 
Beginning work in process was $125,000.

Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
A. $1,160,000
B. $ 910,000
C. $ 760,000
Quick Check 
Beginning work in process was $125,000.

Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
A. $1,160,000
B. $ 910,000
C. $ 760,000
Quick Check 
Beginning finished goods inventory was

$130,000. The cost of goods manufactured for
the month was $760,000. The ending finished
goods inventory was $150,000. What was the
cost of goods sold for the month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.
Quick Check 
Beginning finished goods inventory was

$130,000. The cost of goods manufactured for
the month was $760,000. The ending finished
goods inventory was $150,000. What was the
cost of goods sold for the month?
A. $ 20,000.
B. $740,000. $130,000 + $760,000 = $890,000
$890,000 - $150,000 = $740,000
C. $780,000.
D. $760,000.
Define and give

examples of variable
costs and fixed costs.
Cost Classifications for Predicting Cost
Behavior
How
How aa cost
cost will
will react
react to
to
changes
changes in
in the
the level
level of
of
business
business activity.
activity.
 Total
 Total variable
variable costs
costs
change
change when
when activity
activity
changes.
changes.
 Total
 Total fixed
fixed costs
costs remain
remain
unchanged
unchanged when
when activity
activity
changes.
changes.
Total Variable Cost
Your total long distance telephone bill is

based on how many minutes you talk.
Total Long Distance
Telephone Bill
Minutes Talked
Variable Cost Per Unit
The cost per long distance minute talked is

constant. For example, 10 cents per minute.
Telephone Charge
Per Minute
Minutes Talked
Total Fixed Cost
Your monthly basic telephone bill

probably does not change when you
make more local calls.
Telephone Bill
Monthly Basic
Number of Local Calls

Fixed Cost Per Unit
The average fixed cost per local call

decreases as more local calls are made.
Monthly Basic Telephone

Bill per Local Call
Number of Local Calls
Cost Classifications for Predicting Cost
Behavior
Behavior of Cost (within the relevant range)

Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
Quick Check 
Which of the following costs would be variable

with respect to the number of cones sold at a
Baskins & Robbins shop? (There may be
more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
Quick Check 
Which of the following costs would be variable

with respect to the number of cones sold at a
Baskins & Robbins shop? (There may be
more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
Define and give

examples of direct and
indirect costs.
Assigning Costs to Cost Objects
Direct costs Indirect costs

 Costs that can be  Costs that cannot be
easily and conveniently easily and conveniently
traced to a unit of traced to a unit of
product or other cost product or other cost
object. object.
 Examples: Direct  Example: Manufacturing
material and direct labor overhead
Define and give examples of

cost classifications used in
making decisions: differential
costs, opportunity costs, and
sunk costs.
Cost Classifications for Decision Making
Every decision involves a choice

between at least two alternatives.
Only those costs and
benefits that differ
between alternatives
are relevant to the
decision. All other
costs and benefits can
and should be ignored.
Differential Costs and Revenues
Costs and revenues that differ

among alternatives.
Example: You have a job paying $1,500 per month in
your hometown. You have a job offer in a
neighboring city that pays $2,000 per month. The
commuting cost to the city is $300 per month.
Differential revenue is: Differential cost is:

$2,000 – $1,500 = $500 $300
Net Differential Benefit is:

$200
Opportunity Costs
The potential benefit that is given up

when one alternative is selected
over another.
Example: If you were
not attending college,
you could be earning
$15,000 per year.
Your opportunity cost
of attending college for
one year is $15,000.
Sunk Costs
Sunk costs cannot be changed by

any decision. They are not
differential costs and should be
ignored when making decisions.
Example: You bought an automobile that cost
$10,000 two years ago. The $10,000 cost is
sunk because whether you drive it, park it, trade
it, or sell it, you cannot change the $10,000 cost.
Quick Check 
Suppose you are trying to decide whether to

drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not
relevant.
Quick Check 

concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not
relevant.
Quick Check 

concert. You have ample cash to do either,
but you don’t want to waste money
needlessly. Is the annual cost of licensing your
car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
Quick Check 

concert. You have ample cash to do either,
but you don’t want to waste money
needlessly. Is the annual cost of licensing your
car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
Quick Check 
Suppose that your car could be sold now for

$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
Quick Check 
Suppose that your car could be sold now for

$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
Summary of the Types of Cost
Classifications
Predicting
Financial
Cost
Reporting
Behavior
Assigning
Decision
Costs to
Making
Cost Objects
End of Chapter 1

An Introduction To Managerial Accounting and Cost Concepts: Mcgraw-Hill /irwin

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Chapter 1

Directing and motivating involves managing day-

Identify and give examples of

Raw materials that become an integral part of

Those labor costs that can be easily

Manufacturing costs cannot be traced directly to

Materials used to support Wages paid to employees

Costs necessary to get All executive,

Product costs include Period costs are not

Balance Income Income

Which of the following costs would be

Which of the following costs would be

Manufacturing costs are often

Cost of goods sold for manufacturers

If your inventory balance at the beginning of

If your inventory balance at the beginning of

Prepare a schedule of cost

Calculates the cost of raw

Calculates the manufacturing

Beginning raw Direct materials Beginning work in

Beginning raw Direct materials Beginning work in

Direct Labor Work in

Selling and Period Costs Selling and

Beginning raw materials inventory was

Beginning raw materials inventory was

Direct materials used in production totaled

Direct materials used in production totaled

Beginning work in process was $125,000.

Beginning work in process was $125,000.

Beginning finished goods inventory was

Beginning finished goods inventory was

Define and give

Your total long distance telephone bill is

The cost per long distance minute talked is

Your monthly basic telephone bill

Number of Local Calls

The average fixed cost per local call

Monthly Basic Telephone

Behavior of Cost (within the relevant range)

Which of the following costs would be variable

Which of the following costs would be variable

Define and give

Direct costs Indirect costs

Define and give examples of

Every decision involves a choice

Costs and revenues that differ

Differential revenue is: Differential cost is:

Net Differential Benefit is:

The potential benefit that is given up

Sunk costs cannot be changed by

Suppose you are trying to decide whether to

Suppose you are trying to decide whether to

Suppose you are trying to decide whether to

Suppose you are trying to decide whether to

Suppose that your car could be sold now for

Suppose that your car could be sold now for

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